14 Responses to Tax deductions: Your questions answered

Okay, if I’ve understood your interpretation correctly, you fail to see how this affects NYers, yes? As a former Californian and relatively newbie NYer, I think the issue is this: those who live in NYC generally rent apartments. Renters do not have the option of itemizing deductions (there are exceptions for those who have unusual circumstances like medical bills above 7.5% AGI or whatever, but it’s rare). Hence, NYC dwellers will not feel the change.

Here’s the thing, though. NYC dwellers are very unique. The housing market here is unlike any other market in this country. In every other market, people traditionally buy their homes or condos. So, people who are used to itemizing deductions to include home mortgage interest, etc., will be detrimentally affected by this change. (Btw, they will not simply pay the standard deduction – their itemized deduction will be still be larger than that. They will, hoever, now pay ‘taxes on taxes’ essentially.) In addition, this will act as one more deterrent to buying homes in the future (and perhaps even fuel those bubble theorists more).

One of the major benefits of home ownership is the ability to write off mortgage interest, property taxes AND state/local taxes in order to reduce your AGI. It’s all part of ‘the American Dream’…that keeps getting chipped away.

BTW, if I’ve misinterpreted your basic point and it’s simply that the writers are not being detailed-oriented enough with the numbers, fine, but it makes no difference. As a homeowner in NY and a former homeowner in CA, where local and state taxes are significantly higher than any other regions in the country, this pisses me off greatly.

Jen — I think it’s a stretch to include mortgage interest tax relief as part of the American Dream. There is really no prima facie reason why mortgage interest should be tax deductible while mortgage principal is not and rent is not. Really, it mainly benefits the big banks, because there’s an incentive to stretch out your mortgage payments and to continually refinance, so that you’re only ever paying mortgage interest and not paying down principal.

And the main person I was attacking was the New York City official who said that residents of NYC would see their federal taxes rise by 11%. That, I think, is simply wrong.

And paying both federal and state income tax on your income is not paying taxes on taxes — it’s paying taxes on income. There are many taxes which aren’t deductible, including sales taxes. There’s no particular reason why state income taxes, unlike most other taxes, should be deductible.

As for acting as a deterrent to buying homes, it’s more of a deterrent to taking out a large mortgage, which is similar, but not identical. Many New Yorkers could pay for their apartments in cash but don’t, simply because of the tax implications. Given that they can’t realistically expect the return on their investments to be higher than their mortgage rate, there’s something a bit fucked up about that.

I partially disagree with you. The tax benefit of mortgage interest is a big part of the attraction of homeownership.

Imagine you have a mortgage to the old confirming limit of 333,700USD at 6.00% and 30year fixed. With a twenty percent down payment this gives a purchase price of around 415,000USD. You will have a monthly payment of 2001USD per month with 19,809USD going to interest payment and 4077USD to principal in the first year. Of course the numbers will shift slowly over time.

With the current rules assuming your state and local taxes are over the 9,500USD limit for married couples and an assumed tax rate of 33% for state, local and federal of around 33% (some assume 38% if you in the highest tax bracket) this tax deduction has a value of about 6,500USD in the first year or about 450USD per month. It is a big difference if I have effective costs of 2001USD or 1451USD per month. Just eliminating the deductibility of mortgage interest could potentially reduce prices of real estate priced between 300,000USD and 600,000USD of about 20% percent assuming 80% financing is the norm. For cheaper or more expansive real estate I assume different tax effects like for example AMT and so on would dominate. I didn’t look into this.

Of course this is not what is suggested. It is suggested to eliminate the deductility state and local tax. If it is not possible to deduct state and local tax and I assume I only have mortgage interest to deduct, 9500USD of mortgage tax would be used to replace the standard deduction. The tax benefit would now be 33% of about 10,000USD or about 275USD per month. Instead of paying effectively 1450USD under the proposed rules 1726USD would be the effective monthly cost and increase of about 20% in the first year. For the difference in the tax deductions of 300USD you would need to finance 50,000USD at 6.00% and 30year fixed. Therefore 300USD per month or 50,000USD more financing would have a substantial effect on real estate prices.

The deductibility of mortgage interest is meant to make home ownership more attractive. Of course this had an effect on real estate prices. If this a sound policy is a different question, but it is the status quo. Changing this tax rule will have an effect on home ownership for a certain section of real estate.

John Berry is right: as he says in a very compelling column this week, it’s time to scrap the personal income tax deduction for home mortgage-interest payments. I said as much a few months ago: There is no prima facie…

Heres a story, My wife and I make 117,000 in NYC, renting costs 18,000 annual daycare is 5,000 annual, 3200 for p/t classes and another 30,000 to city state and federal, cigarettes are 7.50 a pack and going up, gas is 3.50 a gallon and going up, and city and state sales tax comes to 8.375% on just about everything I buy. just the taxes and cost come to 56,200, leaving 60,000 disposable income that also goes to the highest utility bills in the county and the other taxes I mentioned. Do you know how hard we have worked for our salaries? we would be better off making 40K a year each in any other state. I dont have my tax info in front of me but the City and State income taxes are definitely a contributing burden to the federal taxable income.

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